6 Tax Facts About the Additional Medicare Tax

In Tax Tip 54, the IRS alerted taxpayers that if their income exceeds certain limits, then they may be liable for an Additional Medicare Tax. 6 Tax Tips Regarding the Additional Medicare Tax are:

1. The Additional Medicare Tax is 0.9%. It applies to the amount of a taxpayer’s wages, self-employment income and railroad retirement (RRTA) compensation that is more than a “threshold” amount. The threshold amount that applies is based on your filing status. If a taxpayer is married and file a joint return, then the taxpayer must combine both spouse’s wages, compensation, or self-employment income to determine if that income exceeds the “married filing jointly” threshold.

3. A taxpayer must combine all wages and all self-employment income to determine if the total income exceeds the threshold. A taxpayer may not consider a loss from self-employment when calculating this additional medicare tax. The taxpayer must compare RRTA compensation separately to the threshold. See the instructions for Form 8959, Additional Medicare Tax, for examples.

4. Employers must withhold this tax from wages or compensation when paying a taxpayer more than $200,000 in a calendar year, without regard to filing status. The employer does not combine the wages for married couples to determine whether to withhold Additional Medicare Tax.

5. A taxpayer may owe more tax than the amount withheld, depending on the filing status and other income. In that case, the taxpayer must make estimated tax payments /or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate. If a taxpayer has too little tax withheld, or did not pay enough estimated tax, the taxpayer may owe an estimated tax penalty. For more on this topic, see Publication 505, Tax Withholding and Estimated Tax.

6. File Form 8959 with the tax return if owing Additional Medicare Tax. The taxpayer must also report any Additional Medicare Tax withheld by an employer on Form 8959.

How do individuals calculate Additional Medicare Tax if they have wages subject to Federal Insurance Contributions Act (FICA) tax and self-employment income subject to Self-Employment Contributions Act (SECA) tax?

Individuals with wages subject to FICA tax and self-employment income subject to SECA tax calculate their liabilities for Additional Medicare Tax in three steps:

Step 1. Calculate Additional Medicare Tax on any wages in excess of the applicable threshold for the filing status, without regard to whether any tax was withheld.

Step 2. Reduce the applicable threshold for the filing status by the total amount of Medicare wages received, but not below zero.

Step 3. Calculate Additional Medicare Tax on any self-employment income in excess of the reduced threshold.

Example 1. C, a single filer, has $130,000 in wages and $145,000 in self-employment income.

C’s wages are not in excess of the $200,000 threshold for single filers, so C is not liable for Additional Medicare Tax on these wages.

Before calculating the Additional Medicare Tax on self-employment income, the $200,000 threshold for single filers is reduced by C’s $130,000 in wages, resulting in a reduced self-employment income threshold of $70,000.

C is liable to pay Additional Medicare Tax on $75,000 of self-employment income ($145,000 in self-employment income minus the reduced threshold of $70,000).

Example 2. D and E are married and file jointly. D has $150,000 in wages and E has $175,000 in self-employment income.

D’s wages are not in excess of the $250,000 threshold for joint filers, so D and E are not liable for Additional Medicare Tax on D’s wages.

Before calculating the Additional Medicare Tax on E’s self-employment income, the $250,000 threshold for joint filers is reduced by D’s $150,000 in wages resulting in a reduced self-employment income threshold of $100,000.

D and E are liable to pay Additional Medicare Tax on $75,000 of self-employment income ($175,000 in self-employment income minus the reduced threshold of $100,000).

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